Classification of
Costs
Costs classified as to relation to a product
Manufacturing costs or product costs
Non-Manufacturing costs or period costs
In direct materials, timely purchasing is
important; it should not be too early or too late.
Too early purchasing will result to higher material
handling costs while delay in purchases might
result to missed sales and dissatisfied customers.
These costs (selling and administrative
expenses) are expensed once incurred. They do
not become part of the cost of the finished
product.
Labor costs are different from salaries paid
to salesmen and office employees. This cost
represents those paid to workers in the factory be
it directly or indirectly working on the product
(direct labor cost &indirect labor cost)
Factory overhead are cost that cannot be
traced to the finished product but they are still
considered as product cost. It is composed of
costs of different behavior; some are fixed, others
are either variable or mixed costs.
Manufacturing/ product cost vs
Non-manufacturing or period cost
If we are to compare product from period
cost, product cost are inventoriable or becomes
part of the asset section while period cost are
considered as outright expense.
Product cost will be transferred to cost of
goods sold (expense) once the related inventory
was sold.
Costs classified as to variability
Variable costs
Fixed costs
It is important to know the behavior of per unit
and total cost.
The behavior of fixed cost is the opposite of variable
cost.
For variable cost (e.g., direct material and direct
labor), total cost increases as production
increases. Meaning, the higher the number of
unit produced, the higher the total variable cost.
As to the total fixed cost, it remains unchanged or is
constant within the relevant range. Meaning, whether
there is an increase or decrease in production, total
fixed cost is just the same (e.g., Fixed cost for 100,000
units produced P 100,000 while Fixed cost for 50,000
units produced P 100,000)
It is important to note that only the total variable
cost varies directly with the changes in
production. The per unit variable cost (e.g., P 5/
unit or P 2 per direct labor hour) is considered
constant (does not change) within the relevant
range. Meaning, whether you produced more or
less units, the variable cost per unit remains
unchanged.
On the other hand, fixed cost per unit varies inversely
with the changes in production. Meaning as
production increases, fixed cost per unit decreases
and vice-versa (e.g., Fixed cost for 100,000 units
produced P 1 while Fixed cost for 50,000 units
produced P 2)
Costs classified as to variability
Mixed costs
Partly variable and partly fixed cost.
As stated in the module, it varies, but not directly with the changes in the level of production.
The partly variable cost was the once that reacts to the changes in the production with the fixed part
remaining constant. As a result, the total mixed cost increases with the changes in the level of
production within the relevant range.
Other example of mixed cost is the postpaid plans wherein there is a fixed plan to be paid by
the subscriber but once they deviate from the inclusions of the plan, or exceed the limit stated,
there is an additional cost incurred.
Costs classified as to relation to manufacturing departments
Direct Departmental Charges
Indirect Departmental Charges
From the word itself, it is directly charged
to the department that incurred such cost.
Meaning, there is no need for allocation since it
can be conveniently identified from the
department that benefited from the said cost.
Usually, this account are charged (in total)
to other account and later, with the use of
different techniques and procedures, will be
allocated to the departments that benefited from
the cost using appropriate bases.
It will be discussed further when we go to
module about Departmentalization of Factory
Overhead.
Example is depreciation of factory building.
First, it will be recognized in a controlling
account such as Depreciation Expense - Factory
Building but later, through allocation (e.g., square
footage), will be allocated to the departments that
are occupying the building (e.g. share in
Depreciation expense of Machining, Assembly
and Painting Department)
Examples of this cost are direct materials
and direct labor incurred by Machining
Department,
Costs classified to their nature as common or joint
Common Costs
These costs is incurred when making use of
the same facilities in the processing of different
products. Example is the salaries of personnel
involved. At the time the salaries are incurred, the
products are distinguishable from one another so
that cost allocation can easily be made.
Like indirect departmental cost, these costs
are subject to allocation. While indirect
departmental cost are allocated to the departments
benefiting from the cost, common costs are
allocated to the products that share in such cost.
Joint Cost
These costs, if compared to common cost,
is indivisible because they cannot be identified
to any of the products being simultaneously
produced.
Since costs are indivisible, the problem
here is how it should be allocated to arrive at
fair estimates of product cost.
Costs classified as to relation to an accounting period
Capital Expenditures
Revenue Expenditures
Based from our earlier discussion, this cost
benefits more than one accounting period and is
recognized as an asset when acquired.
These costs benefits only the current
period and is immediately recognized as
expense in the period incurred.
Examples of these expenditures are those
related to acquisition of tangible/ fixed assets
(Property, Plant and Equipment), intangible
assets (Patent, copyright, trademark) and wasting
assets (oil well, coal mine).
Examples of such cost are salaries and
wages, utilities expense, repairs and
maintenance, advertising expense, sales
commission, etc.,
We recognized the expense related to these
expenditures either through usage or passage of
time (depreciation expense, amortization
expense, depletion expense)
Costs for planning, control and analytical processes
Standard costs
Opportunity costs
These cost will only be arrived at after carefully
analyzing the past experiences and conducting
researches in relation to specific cost. These
cost will be compared with the actual cost
incurred to determine variances/ differences.
The benefit foregone by choosing the best
alternative. It is relevant when choosing among
alternatives for decision-making.
Examples are 5 pieces of raw material to
produced one unit, P 3/ unit, 2 hours per unit,
150% of direct labor cost. These are the cost that
should have been incurred when producing the
actual units.
Example is having a P 500,000 cash to
invest in a profitable business. You are choosing
among leasing spaces or investing in a
well-known company. By choosing to invest in a
well-known company, your opportunity cost is
the supposed income that will be realized had
you chosen to lease the space to tenants.
Costs for planning, control and analytical processes
Differential costs
These are costs that distinguishes one
option to another. These are considered in
evaluating alternatives by considering all the
increases or decreases in costs that are present
among alternatives.
Example is deciding whether to change the
form of advertisement; from newspaper and
flyers to radio and social media marketing.
Before arriving at a decision, the benefits
associated with the cost must be determined in
evaluating what option to consider.
Relevant costs
These are future costs that are considered in
decision making, A matter is relevant if there is a
change in cash flow that is caused by the decision.
The change in cash flow can be: additional amounts
that must be paid. a decrease in amounts that must
be paid.
If we are to compare differential from
relevant, relevant cost are decision-specific,
meaning such cost may be relevant to one situation
but irrelevant to another. On the other hand,
differential cost examines the effects of alternative
courses of action on total costs.
Costs for planning, control and analytical processes
Out-of-pocket cost
Controllable cost
In this type of cost, there is an outflow/outlay of
cash/ other assets to settle the transaction.
When we talk about controllability of cost,
it means that such are under the authorization
of a particular person with authority. If you are
a department head, there are cost within your
department that you can increase or decrease
depending upon your judgment. But there are
also cost to which a department has no control
such as those that are a result of allocation.
Sunk cost
This cost has already been spent/paid and
cannot be recovered. These are independent of
any event and should not be considered in
making decisions